Tax Audit Under Section 44AB of Income Tax Act

Certain businesses reaching the threshold amounts must regularly review or audit their taxes through a chartered accountant for each financial year. The act of Tax Audit is mandated according to the Income Tax Act, 1961, under Section 44AB. It is imposed on all the business individuals and operating businesses in the country. It is done via inspection of financial accounts to check dishonest practices concerning money exchange. 

What are the Types of Tax Audits in India?

There are three types of Tax Audits conducted in India. 

Field Audit: It is also known as an internal audit. It is conducted at the office or at the representative’s office. The auditor needs to be provided with all the necessary documents crucial for carrying out the Tax Audit. 

Office Audit: It is also known as Internal Revenue Service Audits, and thus, it is carried out in the IRS office. It is performed on the indication by the government when deviations are found between tax and estimated returns. 

Correspondence Audit: It is also known as External Audit and is carried out by Third Party to avoid bias in generating the reports. It is also carried out if required and asked for by a letter from IRS. The business individuals are required to mail the required documents on an immediate basis.

What is The Threshold Limit?

As mentioned, specific businesses lying within the threshold limit must undergo tax audits. The Tax Audit limits may or may not vary for different fiscal years. Here are the limits specified for the Financial year 2022-23 or Assessment Year 2023-24 for business persons:

  • If the overall income through sales, gross receipts, or turnover for the previous financial year is more than INR 1 crore. 
  • Individuals declaring lower profits compared to estimation. These people are categorised under Sections 44AD, 44AE, 44AF, 44BB, and 44BBB.
  • If the gross receipts are more than INR 50 lakh for the previous financial year, i.e. 2022-23. 
  • The Tax Audit Limit will further increase for the people utilising digital transactions for more than 95% of the transactions. 
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What are the Different Sections of the Income Tax Act of 1961?

As mentioned previously, multiple sections regulate the Tax Audit. The basic meanings of theirs are enlisted below. 

Section 44AB: The business persons falling in specific Tax Audit limit are eligible for the audit of their accounts. 

Section 44AE: It specifically focuses on the businesses dealing with hiring, leasing, and plying of goods carriages. 

Section 44AD: Business other than the ones specified in Section 44AE.  

Section 44ADA: It deals with regulations of Tax Audits. 

Section 44BB: It involves Tax Audit of Non-Resident Indians (NRIs) that deal with the mineral oils industry. 

Section 44BBB: This section is concerned with civil construction or power projects business performed by International Companies in India.

What is the Purpose of a Tax Audit?

The government specifies the Tax Audit to ensure the following  

  • To main records of financial income of the business individuals by Chartered Accountant
  • To cross-check the Income Tax Returns filed by businesspersons
  • To check malpractices or occurrence of fraud
  • To report any such wrong findings to the government
  • To check for tac depreciation, compliance, and other necessary aspects according to the income tax laws
  • To encourage proper maintenance and monitoring of accounts of business individuals 
  • To encourage business individuals to follow specific methods bound to the scrutiny of the income.

Why Should Business Individuals Focus on Tax Audit?

The government has set penalties for not performing tax audits. It is set based on the delay and adds upto the penalty depending on the time passed. Owing to genuine reasons, there are some permissible delays while others are penalised. Here is key information on both.

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Allowed Delays

Certain reasons are considered true and unavoidable to file an audit report. These are available for reference under Section 273B. The specified reasons are

  • In the circumstances of Tax Auditor resignation
  • Inability to file audit report due to lockdown or strike in a specific region
  • Physical inability or death of individuals handling the accounts of business person
  • Natural calamities
  • Inability to access the account due to no control and cases of fire or theft. 

Penalty on Delays

The delay refers to the inability to submit the report on a set time, that is, before or on September 30 of the year. It results in a penalty of 0.5% of the turnover or a maximum of INR 1.5 lakh. 

How to be Safe from Tax Audit?

Business individuals look forward to saving their income from tax. The best possible way is to follow a legally stated calculation method and avoid penalty imposition. Here are a few points that will help:

  • Maintain and regularly monitor the accounts based on the required format. 
  • Be updated with the current norms and financial limits eligible for Tax Audit. 
  • State taxable income and permissible loss in Income Tax Return file. 
  • Follow chapter IV of the Income Tax Act, 1961, for accurate and reliable calculation of profit or gain. 

Ensure the preparation of the Tax Audit in electronic format.

Important Points to Know About Tax Audit

A business person need not blindly cover all or every income under tax Audit. There are certain limitations to considering the amount eligible for Tax Audit. 

  • The Tax Audit does not apply to total turnover if the person earns from sources other than business. 
  • In such cases, the cumulative gross receipts must cross INR 50 lakhs for all professions.
  • If a business individual performs more than one transaction and the total turnover is more than INR 1 crore, it is categorised inside the Tax Audit limit. 
  • Business turnover of more than 1 crore and gross receipts from the profession of more than 50 lakhs are eligible for a Tax audit. 
  • If the respective amount in the above cases is less than INR 1 crore and 50 lakhs, coupled with the selling of fixed assets, then the individual is eligible for a tax audit. 
  • The sales not included in turnover or gross receipts are:
    • Fixed assets
    • Income from the interest that is not obtained from business income
    • Rental income
    • Investment assets
    • No revision of tax audit report after filing it online
    • The reimbursed expense from the client
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Tax Audit is a mandatory part of every business individual earning above the specified limit. It must be filed carefully and on time to avoid any penalty or extra loss of income. The Tax Audit is carried out by Chartered Accountant to verify the income tax returns and to check for any discrepancies or fraud. The article enlists an introduction with basic terminologies followed by multiple important aspects to know about Tax Audits. Ensure to file the Tax Audit report is on time by an authorised Chartered Accountant.

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